What is the food cost formula?

The food cost percentage formula compares the cost of ingredients to the revenue generated by a menu item. This ratio, expressed as a percentage, helps restaurant managers monitor expenses and set effective pricing strategies.

Accurate calculations are necessary as small errors can impact profit margins. To get useful insights, choose the food cost formula and data points that align with your goals. For instance, you can analyze your restaurant’s financial performance by analyzing:

• Food cost percentage for a specific period of time
• Food cost percentage for a specific dish
• Food cost percentage per serving of a specific dish

You can calculate food cost percentage for a specific time period, dish or serving. Comparing theoretical and actual food costs can also help identify discrepancies, control waste and improve overall efficiency.

Why should you pay attention to the food cost percentage?

Tracking food cost percentage is an important aspect for maintaining profitability. It helps ensure menu prices cover ingredient costs as well as other operating expenses like labor, rent and utilities. If items are underpriced, high sales volume may not generate enough revenue to stay financially healthy.

Restaurants can lose money over time by undercharging or overcharging without realizing it. Regularly calculating food cost percentages helps identify pricing issues early and supports better decision-making.

Analyzing food costs by time period, dish, portion size or shift can reveal patterns that average percentages may miss. Since ideal food cost benchmarks vary by concept and menu, it may be important to tailor your analysis to your restaurant’s unique needs.

Design more profitable menus

Accurate food cost percentages can guide you when designing a restaurant menu. They help identify which items are most profitable and which may need to be adjusted or removed. If a dish falls outside your target margins, you might update the recipe by adjusting portion sizes, using more cost-effective ingredients or replacing premium components.

Some popular items with higher food costs may still deserve a place on the menu. By reviewing each item’s cost and price and considering the overall menu balance, you can offset lower-margin items with more profitable ones to maintain healthy averages across the board.

Create data-driven promotional strategies

You can also use food cost percentages and menu data to develop your promotional efforts by determining which items are most likely to offer the best return on your investment. Highlighting menu items with the best profit margins encourages guests to opt for items best positioned to amplify your revenue.

Other data-backed promotional strategies may include bundling a popular but higher-cost item, like a prime beef burger, with lower-cost items, such as chips and a soda. Promoting this combination helps bring in guests who want the premium item while protecting your profit margins.

Align pricing with wholesale food trends and supplies

Food cost percentages are influenced by supply and demand, ingredient availability and overall market pricing. Changes at any point in the supply chain can affect profitability and impact how you manage inventory and menu pricing. Tracking ingredient costs regularly helps you control expenses, maintain margins and make informed updates to your menu.

Understanding seasonal price shifts and market trends allows you to plan ahead. If a key ingredient becomes more expensive, you may decide to adjust pricing, revise the recipe or temporarily remove the item. Staying informed also helps with vendor negotiations, such as locking in pricing before anticipated increases. These strategies help support consistent food cost percentages and strengthen overall financial performance.

How to calculate food cost

Several metrics can be used to calculate food cost and inform your menu and inventory strategies.

Overall food cost percentage calculation

Overall food cost percentage looks at the food costs and revenue for your restaurant’s menu in its entirety and is often used to gauge and manage the restaurant’s overarching financial health.

The formula for calculating food cost percentage is:

• Total Food Cost Percentage = (Total Cost of Goods Sold / Total Revenue) x 100

Before you can use this formula, you need to gather some information about your restaurant. Start by taking an inventory count and logging the costs for each item. Then, use this formula to calculate the total cost of goods sold (CoGS):

• CoGS = ((Beginning Inventory value) + (Inventory Purchase Value)) – (Ending Inventory Value)

In this formula, ending inventories are subtracted from the sum of beginning inventory plus purchases to determine the actual costs of goods used during the given time period. This ensures that only the costs of items actually used are included in your calculation.

For example, say your restaurant has a starting monthly inventory value of $12,000, inventory purchases of $5,000 for that same month and an end-of-month inventory value of $7,000. The formula to calculate CoGS would look like this:

• (($12,000) + ($3,000)) – ($7,000) = $8,000 (CoGS)

The restaurant used $8,000 of inventory that month, representing the actual costs for the period.

Next, you can add up your total or gross revenue for the same period as the CoGS calculation. Input both values into the food cost percentage calculation. Using the previous example and a revenue value of $28,000, the food cost percentage calculation would look like:

• (Total Cost of Goods ($8,000)) / (Total Revenue ($28,000)) x 100 = 28.6%

With these calculations, your restaurant has an overall food cost percentage of 28.6% for the given period.

Food cost per serving calculation

Calculating food cost percentages for each serving of each dish on your menu may seem tedious, but the information gained is invaluable. Per-serving food costs percentages are more granular, delivering more details about the profitability of every dish and the feasibility of current portion sizes.

To calculate the food cost per serving, use this formula:

• Food Cost Percentage per Serving = (Total Cost of Dish per Serving / Sale per Serving) x 100

To complete this calculation, review how much each item in your inventory costs and how much of that cost is represented in each serving. Breaking down raw materials into per-recipe or per-dish portions helps determine the cost per serving.

If a recipe for a single cake uses four eggs at 25 cents each and yields six servings, you can calculate: (0.25 cents x 4) / 6 = 16.6 cents. Therefore, each serving costs 16.6 cents in eggs.

Here are the two formulas you’ll need to find the values integral to the per-serving food cost formula above:

• Cost per Serving = (Food Cost of Ingredients x Weekly Sale Amount)

• Total Sales per Dish = (Sale per Serving x Weekly Sale Amount)

Various digital tools can help make calculating food costs more efficient and accurate. Logging food costs over time using spreadsheets can help you identify trends and plan ahead for increased profitability.

Ideal food cost percentage calculation

Using the information you gathered above, you can calculate your restaurant’s ideal food cost percentage. The result will tell you what percentage you should aim for when purchasing inventory and setting menu pricing.

The formula for ideal food cost percentage is:

• Ideal Food Cost Percentage = (Total Cost per Serving / Total Sales per Serving)

If you calculated your total cost per serving as $3,000 and your total sales per serving as $10,000, your ideal food cost percentage calculation would look like this:

• Ideal Food Cost Percentage (30%) = (Total Cost per Serving ($3,000) / Total Sales per Serving ($10,000)) x 100

Actual food costs are calculated by dividing the total cost of food used by the total food sales for a given period. Comparing actual food costs to ideal food costs is important for identifying discrepancies. Significant differences between the two numbers could indicate over-ordering, wasting ingredients or even missing product, which can impact your restaurant’s profitability.

For example, if your food costs are 32% and your ideal food cost is 30%, that means you have a food cost variance, or loss, of 2%. Because restaurant food costs include the cost of food and labor costs, indirect costs and other expenses, you might need to increase menu prices, institute new waste prevention measures or review records to identify vendor price increases.

Inventory management and food costs

Effective inventory management and controlled food costs often go together. Restaurant owners who consistently track inventory levels, monitor food usage and adjust their ordering practices can significantly reduce food waste and avoid costly overstocking. Implementing a strong inventory management system helps lower total food costs, potentially improving profit margins by ensuring that every ingredient is used efficiently.

By analyzing inventory data alongside food sales, you can identify which menu items are performing well and which may contribute to unnecessary waste. You might also track waste across kitchen stations to see if ingredients are correctly utilized. A steak that’s overtrimmed or orange peels tossed with zest intact could represent a lost opportunity to limit expenses.

Optimizing inventory management allows for smarter purchasing decisions, more accurate menu planning and the ability to make the most of every order, all of which can contribute to lower costs and a healthier bottom line.

Technology and food costs

Technology has become an indispensable tool for managing food costs throughout the food and beverage industry. Modern restaurant POS systems, such as Lightspeed and Toast, offer advanced features that make it easier to calculate food cost percentage, track inventory in real time and generate automated reports.

These systems can seamlessly integrate with accounting software and supplier management platforms, giving restaurant owners a comprehensive view of their food costs and overall financial performance.

By leveraging technology to streamline inventory management, you can minimize manual errors and make more informed decisions about menu pricing and food cost control. This increased efficiency and data-backed decision-making could give you space to re-focus on other tasks, like growing your business, even as you maximize profits.

Implications and optimization of food cost percentage

Food cost percentage formulas generate figures that are specific to your restaurant and are therefore highly useful as you begin to adjust your menu and inventory. This data can be helpful for analyzing the factors that affect your business and helping you take action to improve operations.

More specifically, food cost percentages can help you:

• Measure your restaurant’s costs relative to industry standards
• Gauge the profitability of menu items
• Decide how to set menu prices
• Evaluate and/or compare vendor wholesale prices
• Implement or improve your inventory management system

In addition to finding more cost-effective replacements or making adjustments to your menu, you can also try a few easy fixes to lower your food cost percentage. Consider aspects of your menu and operational practices, such as:

• Large portion sizes: If customers regularly do not finish their meals, consider whether reducing portions might prevent food waste.
• Small portion sizes: When customers want bigger portions, adding more expensive ingredients like seafood can be cost-prohibitive. Instead, you can add to the dish with filling yet cost-effective sides, such as fries, bread or pasta.
• Complimentary items: If you’re offering complimentary items, such as tortilla chips and salsa to start each meal, make sure these items are represented in your food cost calculations.
• Seasonal menu adjustments: Items like fruits and vegetables have variable costs according to the season. Be sure to recalculate food costs and adjust menu items and prices accordingly. If it fits your restaurant’s theme and menu, consider tweaking dishes to reflect seasonality. A fall pasta dish with mushrooms can become a spring onion and pea pasta to take advantage of seasonal produce discounts.
• Highlight profitable dishes: Promoting your most profitable dishes can help lower your food cost percentage. If your most profitable item is a pasta dish, develop a promotion that emphasizes its value over less profitable dishes or use menu design to make that particular dish more eye-catching.
• Vendor fees: Consider revisiting your vendor agreements to see if you can get certain ingredients at a lower cost by switching vendors or renegotiating your deals with your current suppliers.

A successful restaurant consistently monitors food cost percentages and makes informed menu strategy adjustments. The time invested in tracking data, analyzing trends and trying out adjustments can help keep expenses and revenue balanced.

Best practices for food cost management

To help regulate food costs and maintain healthy profit margins, you may want to consider adopting a set of proven restaurant best practices:

• Calculate food cost percentage regularly to monitor trends and catch any issues early.
• Monitor inventory levels and adjust menu prices as needed to reflect changes in ingredient costs.
• Reduce food waste by optimizing portion sizes, using leftovers creatively and training staff on proper storage and handling.
• Negotiate with suppliers for better pricing.
• Set a clear target food cost percentage and compare it to actual food costs.
• Analyze sales data and menu item profitability regularly to inform your pricing strategy and menu engineering decisions.

By incorporating these practices, you may be better equipped to stay competitive in a fast-paced industry.

Food costs and food cost percentage are typically important factors in a restaurant’s financial success. Understanding and calculating food cost percentage may empower restaurant owners to make informed decisions about everything from portion size and menu pricing to inventory management and waste prevention systems.

Whether you’re an experienced operator or new to the restaurant industry, prioritizing food cost management and tracking your restaurant’s finances consistently could be your gateway to a more profitable and sustainable business.